Global crisis won't hit home-led India much: IMF
International Monetary Fund executive director-India Arvind Virmani is confident that the Indian economy can sustain a growth rate of over 8%, but says high inflation remains a concern. He suggests some structural changes to contain inflation and reasons out the difference in the IMF and the government’s growth forecasts in an interview with ET. Excerpts:
The IMF’s forecast for GDP growth at 9.4% is different from the government estimate of 8.5%.
Our impression was that the IMF or the World Economic Outlook’s predictions were too pessimistic in the last three to four years. So, we asked them their methodology and found two varying elements. They make estimates on calendar year, as against our fiscal year. But, the more important thing is they make estimates for GDP at market prices while our discussions focus on GDP at factor cost.
Over 20 years, the difference evens out, but in individual years it can differ quite a bit. For example, last year, the GDP at market price growth rate was 0.8% lower than that at factor cost. The year before that it was 1.2% slower. It is now catching up.
Will the renewed concern in the US and the slowdown in Chinese impact India?
Though China can maintain its growth by public investments for 3-5 years of the crisis, it will have to fundamentally change its development strategy after that. The reason is that its policy was export-oriented and trade growth would be slow in the next 5-10 years. They will have to address the fundamental issues, which they haven’t done or have been slow in doing. In contrast, domestically oriented economies with export-neutral policies like India would not suffer, and therefore would gain relative to economies like China, Europe and the United States.
The final result of this would be that India’s growth rate will be higher than that of China’s by the middle of the decade (as I have been predicting for almost a decade). As far as Europe and USA are concerned, there are still fluctuations. They will have a U or even a W-shaped recovery.
Do you expect private investments into the country to get affected?
One of the factors for the quick recovery of capital flows is the easy money policy of the USA. With money supply easy, interest rates are very low in the US. So, at least, the high-income individuals look for diversification of their portfolio. This is driving the capital into dynamic emerging markets. And given India’s potential, recovery in capital inflows has been much faster than predicted.
One of my concerns earlier was we need to act much faster on the financial sector reforms, so that domestic savings can be channeled into long-term investments. Not enough was happening on risky investments or long-term capital because global capital flows were not expected to recover as fast as they have. We now have more time to reform and improve the financial markets for long term and risk capital.
On the other side of the picture are the lessons from the Greek crisis. Greece grew very fast in the last seven years and they became very complacent about the fiscal deficit. I don’t think there is any problem on the fiscal deficit in India today but it’s always good to think about the future.
We have a very forward-looking FRBM Act and also the Thirteenth Finance Commission’s recommendation to lower the debt to GDP ratio. I think it’s very important to focus on all this in the good times, so that if and when there are bad things emanating from outside, we will be safe. Deficit reduction will also help reduce the volatility in capital flows.
source: www.economictimes.com
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